Real income principle excludes validly diverted partnership share under a binding sub-partnership arrangement.

A partner in a registered firm is assessable only on his real income, not on the full share notionally allocated under section 23(5)(a) of the Income-tax Act, 1922. Where a valid and binding sub-partnership diverts part of the partner's share before it becomes his beneficial income, that diverted portion is excluded from assessment in his hands. On the facts, the arrangement was genuine and operated as a partnership within a partnership, so only the amount actually remaining with the partner was taxable.

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Issues: Whether, in the assessment of a partner in a registered firm, the amount assessable as his share of profits was the full share allocated to him under section 23(5)(a) of the Income-tax Act, 1922, or only the amount remaining after giving effect to a valid sub-partnership arrangement under which part of that share was diverted to others.

Analysis: The relevant enquiry was not confined to the mechanical allocation made under section 23(5)(a), but extended to the partner's real income. Where a legally binding arrangement creates a sub-partnership and diverts part of the partner's share before it constitutes his beneficial income, that diverted portion cannot be treated as income of the partner. The Court accepted that the arrangement between the assessee and the four other persons was genuine and operated as a partnership within a partnership, with the result that the assessee's taxable income was only the portion that actually remained with him after the sub-partnership share was deducted.

Conclusion: The assessee was assessable only on Rs. 5,864 and not on Rs. 14,661.

Final Conclusion: A partner in a registered firm is taxable only on his real income, and where a valid sub-partnership diverts part of his share at source, the diverted amount is excluded from his taxable share.

Ratio Decidendi: In the assessment of a partner in a registered firm, the amount taxable is the partner's real income, and any portion of the share validly diverted by a binding sub-partnership before it accrues to him is not assessable in his hands.

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